RBA Model Points to a Real House Price Slump of 40% from Peak

Boogerman on 18/06/2022 - 10:06

A key finding from the RBA’s Saunders-Tulip model of the housing market that we have emphasised in judging the outlook for house prices is the extreme sensitivity of house prices to interest rates, where a permanent 100 basis point increase in the real cash rate reduces real house prices by an estimated one-third over the long term.

Using a modified version of the ST model, Coolabah Capital Investments has analysed the impact of temporary changes in interest rates on the housing market, focusing on current market pricing of a broad peak in the cash rate of 4.25% over 2023 followed by rate cuts in 2024 and 2025. This analysis suggests that this cycle in interest rates still has a significant effect in the short term, pointing to a large correction of about 30% in national home prices over the next four years (or circa 40% from late 2022 onwards)……

https://www.livewiremarkets.com/wires/rba-model-points-to-a-…

Sydney & Melbourne already peaked around March & will be down around 3% by end of June. This is before interest rate rates have started taking a true effect.

A 4.25% increase equates to your average home mortgagee paying at least 6.5%, which means $1200/month more on a $500K loan & $2500/month more for $1M loan.

Here's your reference for current house (& unit) prices by city:
https://www.corelogic.com.au/our-data/corelogic-indices

The model & forecasting takes into account falling vacancy rates & increased rental rates (to counter that argument)

Financial

Comments

  • pegaxs on 18/06/2022 - 10:11
    +14

    Good.

    • HeWhoKnows on 19/06/2022 - 16:55

      RBA models often have unrealistic assumptions hence they rarely work
      They forecast 20-30% slump in property during COVID19 and that never happened
      Regardless properties have already slumped 20% in some places.
      So whats another 20% ?

      Property was already 100% overvalued due to artificial and extremely low interest rates.
      Those artificially low rates simply pumped up asset prices without any regard to yield or returns so property (and shares) need to pull back by 50% just to get back to reality (once interest rates get back to reality/normal)

  • orangetrain on 18/06/2022 - 10:30
    +2

    Any takers on RBA lying or misleading again?

    • netjock on 18/06/2022 - 13:00
      +2

      Coolabah Capital Investments

      Everyone investment house is making more outrageous claims either to get press space or pushing down prices so they can get it at the low point. I'd take it without a grain of salt.

      peak in the cash rate of 4.25% over 2023 followed by rate cuts in 2024 and 2025

      effect in the short term, pointing to a large correction of about 30% in national home prices over the next four years

      So effectively it would short term crash and long term might go back up. So unless you sell if you average it out we're probably back to where we are depending on how low rates go in 2025

      40% from late 2022 onwards

      The biggest problem is going to be how many people would be 40% down. If you borrowed 80% on a $1m property and it goes down 40% to $600k you're on the hook for $200k to the bank if you sell. So even if house prices tank 40% you won't be able to move. That is at the extreme end. What percentage of people have 40% equity and would go to zero (when selling) and then having to come up with 20% to buy back at lower prices?

      Don't forget a lot of buying by people are from taking out equity due to capital appreciation as deposit on the next one. So 40% drop would basically close off that option. Then you've got people who want to upgrade. Close that option. What is left is people who have been siting in cash (some lucky but probably a lot of perma bears)

      Bank of mum and dad would also be closed as their property values have dropped. Only buyers left are foreign buyers with questionable sources of wealth.

      THAT is before looking at the cost to build. Can a $1m property drop 40% to $600k and it costs $400k to replace the house on the block? Lot of new estates are selling $500k. Cost to build probably $350k so basically after 40% drop someone is paying you to take the land?

      • rektrading on 18/06/2022 - 14:29

        Coolabah Capital Investments

        That name sound familiar.

        I'm sure someone (not you, of course) has a crush on this team but can't remember who.

        • miwahni on 18/06/2022 - 22:12
          +5

          Christopher Joye (portfolio manager of CCI) correctly called the rise in 2020 and 2021 after a modest decrease of 5%, when other economists etc were throwing around the panic numbers of a 20% decrease or higher, in early 2020. His column in the AFR is always informative and he's been saying since late last year that a 100 basis point increase in rates is expected to cause a 15% - 25% correction. Will be interesting to see if he got this one right as well.

          Certainly much better researched than old Mr Doom-n-Gloom Martin North of Digital Finance Analytics, even if this time round they reached the same conclusion.

          • netjock on 18/06/2022 - 23:52
            -3

            @miwahni:

            100 basis point increase in rates is expected to cause a 15% - 25% correction

            The market expects RBA to go to 3.5%. Does that mean a 75% fall in house prices.

            Don't forget if house prices fall 75% the cost of living in theory reduces drastically and when the cost to retrench people, pay out their severance is cheaper than rehiring them all at minimum wage (if you think a $200k IT person will be on $50k).

            That would be interesting indeed. Fuel can be $2 a liter but if you're $700k home is now $175k the difference is enough to pay for a lifetime of fuel. Or a few Teslas and 30kw off the grind with batteries to charge them all up.

            • miwahni on 25/06/2022 - 23:47

              @netjock: Ooh no I think that's taking it to extremes - more like a possible 30%? But who knows, we're in uncharted territory right now.

    • HeWhoKnows on 19/06/2022 - 16:59
      +2

      They are already lying/misleading about inflation being 5.1%
      In a recent survey most OBs placed the REAL inflation rate between 10% and 20%

  • rektrading on 18/06/2022 - 10:32
    -3

    RBA Model Points to a Real House Price Slump of 40% from Peak

    Bull.

    • skid on 18/06/2022 - 10:33
      +9

      Bear.

  • SF3 on 18/06/2022 - 10:32
    +4

    RBA Model Crystal ball Points to a Real House Price Slump of 40% from Peak

    Yeah ok.

    • HeWhoKnows on 19/06/2022 - 17:03

      Crysal ball is more accurate

  • DarkOz on 18/06/2022 - 10:34
    +1

    I don't believe it until I see it.

    • HeWhoKnows on 19/06/2022 - 17:04

      Property is down 20% already from the 2021 October peak in Sydney
      Ask any real estate agent!
      I have witnessed this fall myself.

  • sss333 on 18/06/2022 - 10:35

    real house prices by an estimated one-third over the long term.

    So don't expect nominal to fall that much

    • sss333 on 19/06/2022 - 13:44
      +1

      Interested why people are negging this?

  • rektrading on 18/06/2022 - 10:35
    -1

    Brofessors spend their whole life looking at history and the best they can do is may be get one or ✌️ trades right.

    Imagine doctors getting one or ✌️ diagnoses right.

    • [Deactivated] on 18/06/2022 - 10:55
      +1

      I somewhat agree, you basically always have university professor expert opinion on almost all sides, bear, bull, the same that it makes it kinda irrelevant. I've definitely seen more wrong than right.

    • SF3 on 18/06/2022 - 10:57
      -1

      Brofessors

      No skin in the game and catalyst for black swan events.

      They can’t comprehend Absence of evidence is not evidence of absence.

      doctors

      Has skin in the game.

    • Crow K on 18/06/2022 - 17:16

      Loving the irony of "staring at candlebar charts" cryptobros throwing shade like this.

      • rektrading on 18/06/2022 - 17:21

        Trade the chop.

        That's it.

  • bemybubble on 18/06/2022 - 10:37
    +1

    You lost me at tulip…

  • capslock on 18/06/2022 - 10:40
    -1

    20% max I reckon

    • DarkOz on 18/06/2022 - 10:46
      +3

      Interest rate?

  • apsilon on 18/06/2022 - 10:42
    +1

    A 1% interest rate increase reduces house prices long term by a third? When have we ever seen this? So a 3% interest rate increase and houses will basically be free?

    • netjock on 18/06/2022 - 23:56

      They would be basically paying you if you look at the cost to build.

  • GordonD on 18/06/2022 - 13:19
    +1

    Economists predict …

    … and when are they ever right?

    • El-Rhi on 20/06/2022 - 06:39
      +1

      If you have followed Christopher Joye and his forecasts over the years, they are surprisingly accurate

  • WreckTangle on 18/06/2022 - 14:01
    +2

    Great. Glad I bought An affordable regional house and didn’t buy a $1 million overpriced house In Sydney and Melbourne.

  • ALesha77 on 18/06/2022 - 14:13
    -1

    Good to see paper analysts finally catching up to a random posting random stranger analysis from a few days back - https://www.ozbargain.com.au/node/706538

  • Rizzler on 18/06/2022 - 14:32
    +1

    go and rent then. You think rents won't go up with all this negativity / uncertainty, will only slow down new supply - vacancy rates already at record lows…..sure house prices will come off the peak but if you have your pecker in your hand waiting for a 40% drop you're a muppet.

    • Some Human on 18/06/2022 - 15:15
      +2

      I'm guilty of that muppetism. I waited 10 years for a "crash" and it never happened. Threw away about 130 - 150k in rent waiting for it.

      Now I know how ridiculous I must have seemed to the people encouraging me to buy.

      • Rizzler on 18/06/2022 - 16:00

        Use this moment to buy the best house in best location, believe me when the market goes back to FOMO and you think it’s safe to buy - you’ll compromise your must haves and end up with a bad layout on an average street.

        • Some Human on 18/06/2022 - 17:01

          I ended up buying just before covid hit and drove the prices sky high, but this is very good advice for anyone still "waiting for the crash".

  • askme69 on 18/06/2022 - 14:36
    +2

    So down 10% compared to 15 months ago.

  • elgrande on 18/06/2022 - 15:44

    Is a 4.25% increase being talked about?

    • Boogerman on 19/06/2022 - 09:11
      +1

      As per the article, priced in by bond market futures

    • gromit on 19/06/2022 - 14:06

      absolutely, 2.5-3.0% this year alone and expect rises throughout next year too.

  • brendanm on 18/06/2022 - 17:37
    +1

    How much did house prices drop when interest rates went to 17%?

    • miwahni on 18/06/2022 - 22:37
      +6

      For Sydney the drop was around 6% - from low $190k to low $180k average price. This was a totally different market, though, where the income/ mortgage ratio was a lot lower than it is today eg average wage was around 1/3 of the house price, or slightly higher. Also money wasn't cheap prior to the 17% rate so people weren't leveraged to the max. It was bad enough then, with the recession "we had to have" where people were simply walking away from their houses due to unemployment stress etc. At least this time round the employment numbers are strong, although that's cold comfort for anyone who "has" to sell if /when prices drop (divorce etc).

      • brendanm on 19/06/2022 - 08:52
        +1

        So if it's a "different market", and they have y seen this before, how are they coming up with these figures? These are the people who said rates wouldn't be rising for another 2 years.

        • miwahni on 25/06/2022 - 23:51

          The RBA certainly got it wrong, they were anticipating low inflation to continue for a couple more years yet, but were really caught out by the inflation increase. Who knows what will happen this time around, though. The "best guess" figures that I've seen have come from modelling released by the RBA but as we've just seen, anything can happen to throw the figures out of whack.

          Anyway, I'm buying some RMBS as a means of diversification - who knows, with the increase in rates these may just be the next big thing.

          • brendanm on 26/06/2022 - 07:47

            @miwahni:

            they were anticipating low inflation to continue for a couple more years yet, but were really caught out by the inflation increase

            So the people who run the rba couldn't figure out that endless money printing, coupled with shortages, would cause inflation? Did they drop out of school in year 3?

      • gromit on 19/06/2022 - 14:12

        average wage was in mid to late 20's then not 60;s. so it was about 1/6 of house price.

  • Gotchas on 18/06/2022 - 22:20

    Prices are already down at least 20% from the max someone would of paid at the peak to what the lowest someone will sell a like for like property

  • mini2 on 26/06/2022 - 21:39

    I'm not greedy, 30% will do so I can upgrade. Got a funny feeling that the suburbs I want to trade up to aren't so interest-rate sensitive.

  • rogerwilko on 28/06/2022 - 18:19

    Wow. 40% that quite high. Is that the median? If so, does that mean some property will drop by 60% and others by 20%, depending on the suburb?

    • Boogerman on 29/06/2022 - 07:59

      Yes, Melbourne & Sydney will fall by more (as they already started falling in March) & the higher priced suburbs will fall more. The lower priced houses that receive government subsidies/support (eg: up to $950K government buy in & stamp duty exemptions/reductions) will not fall as much.
      So in a nutshell, if you want a 50%+ discount, buy in an expensive Sydney suburb

      • rogerwilko on 29/06/2022 - 21:53

        I feel that the inner suburbs did not increase as much as the outer suburbs. Don't really have any proof but I saw a 500m2 piece of land advertised in outer sydney for 1.1million.

  • Boogerman on 29/06/2022 - 08:05

    Sydney down 2.6% since May interest rate rise (18% annualised). Melbourne down 1.9% also (13% annualised).
    Remember folks we have at least another year's worth of interest rate rises, so expects these falls to accelerate & these annualised rates to jump beyond 20%.

  • rektrading on 29/06/2022 - 15:12

    .#HODL the line.

  • Boogerman on 06/07/2022 - 08:33
    +1

    Rates go up, up, up!
    House prices go down, down, down!

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